Argentine Central Bank board member fired for opposing "financial bicycle" bubble
Argentine President Mauricio Macri ordered the removal of Central Bank board member Pedro Biscay for making "diverse manifestations" in opposition to Central Bank policies.
Biscay has expressed concern over an ongoing financial bubble in Argentina known as the "bicycle."
A specialist in prosecuting financial fraud, Biscay, 38, spearheaded investigations into alleged HSBC money laundering and tax evasion revealed by SwissLeaks in 2015 - a case dropped by the Macri administration last year.
He had been publicly critical of economic policy under Macri's right-wing administration, its promotion of the financial bicycle in particular.
Biscay, appointed in 2014 by former President Cristina Kirchner, was the sole remaining Central Bank board member not appointed by Macri, and the only one confirmed by the Senate (Macri installed the other nine by decree). His term was due to expire in 2020.
Pedal to the metal
The financial bicycle refers to the ongoing boom in carry-trade transactions made possible by financial deregulation enacted by Macri and his Central Bank president, Federico Sturzenegger, since taking office 18 months ago.
This trend has been largely financed by the Central Bank itself through short-term bills known as Lebacs.
The Lebacs, issued in pesos and typically purchased for a 28 or 35-day term, pay an annualized 26% rate - or 10 to 15% in dollar terms. Attracting mostly domestic speculators, Lebacs are typically rolled over, with the profits used to buy dollars that are then wired overseas.
The value of Lebacs outstanding has more than tripled under Macri to 940 billion pesos ($54 billion).
The largest recent maturity, on June 19, suggests growing market unease over the Lebacs: a record 23% ($8 billion) were cashed in and wired overseas, rather than rolled over. The dollar has since risen 9%, to 17.50 pesos.
Central Bank data show that of $60 billion in public foreign debt added in the last 18 months, $37 billion have gone to finance the "bicycle" and other capital flight.
The scheme has drawn comparisons to the bubble created at the height of Argentina's last dictatorship in 1980, when the Central Bank issued Lebacs paying up to 60% interest in dollar terms to attract investment - only to end in a financial collapse in 1981 after insiders "bicycled" some $20 billion of the profits to offshore accounts.
Tax cuts decreed by Macri within days of taking office raised already high budget deficits by 62% in 2016, and higher interest payments have pushed deficits up another 43% in the first half of 2017. Cutbacks in utility subsidies for households and businesses have meanwhile led to a severe recession - but not lower deficits.
The OECD earlier today called on Macri to reduce Argentina's budget deficit, which may reach a record $40 billion this year (6% of GDP).
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Pedro Biscay
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What Biscay was trying to warn them of (i.e. that financial bubbles make for bad economic policy), Argentina's already been through.
During 1979 and '80, the Central Bank attracted "investment" using the very same mechanism (albeit with more intensity). By April 1981, it was all over - and it took a decade to recover from that one.
Fast-forwarding to 2017, if by October the rollover rate for these Lebacs drops below 50% (it's already slipped to below 80%), the bicycle will stop - and, of course, tip over.
The dictator, General Videla, and Economy Minister (and business press darling) Martínez de Hoz smiling at the height of the last 'bicycle' boom in 1980. Within a year, the boom went bust, leaving Argentina in a decade-long depression from which it has never fully recovered.
